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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 1-13916
UNION PACIFIC RESOURCES GROUP INC.
(Exact name of registrant as specified in its charter)
UTAH 13-2647483
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 7, 801 CHERRY STREET, FORT WORTH, TEXAS
(Address of principal executive offices)
76101
(Zip Code)
(817) 877-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of July 31, 1996, there were 249,246,400 shares of the Registrant's
common stock outstanding.
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UNION PACIFIC RESOURCES GROUP INC.
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED STATEMENTS OF CONSOLIDATED INCOME - For the
Three Months and Six Months Ended June 30, 1995 and
1996....................................................... 1
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION -
At December 31, 1995 and June 30, 1996..................... 2 - 3
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS - For the
Six Months Ended June 30, 1995 and 1996.................... 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......... 5 - 10
INDEPENDENT ACCOUNTANTS' REPORT.............................. 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 12 - 22
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS............................................ 23
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K............................. 24
SIGNATURE............................................................. 25
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1995 1996 1995 1996
------- ------- ------- -------
Operating revenues: (Note 4)
Oil and gas operations:
Producing properties.............. $ 215.3 $ 267.8 $ 420.9 $ 499.8
Plants, pipelines and marketing... 87.1 125.6 162.7 239.8
Other oil and gas revenues........ 9.9 4.4 27.2 16.7
------- ------- ------- -------
Total oil and gas operations.... 312.3 397.8 610.8 756.3
Minerals............................ 29.0 30.1 55.2 61.3
------- ------- ------- -------
Total operating revenues........ 341.3 427.9 666.0 817.6
------- ------- ------- -------
Operating expenses:
Production.......................... 57.4 63.6 115.4 126.4
Exploration......................... 22.0 32.2 42.5 61.9
Plants, pipelines and marketing..... 45.8 65.8 86.6 126.4
Minerals............................ 2.8 2.2 4.5 3.8
Depreciation, depletion and
amortization.................... 113.1 127.5 219.5 251.2
General and administrative.......... 12.1 16.5 22.9 30.5
------- ------- ------- -------
Total operating expenses........ 253.2 307.8 491.4 600.2
------- ------- ------- -------
Operating income....................... 88.1 120.1 174.6 217.4
Other income (expense) - net........... 3.6 (1.5) (0.3) 0.5
Interest expense - net (Note 2)........ (1.4) (12.5) (2.6) (25.5)
------- ------- ------- -------
Income before income taxes............. 90.3 106.1 171.7 192.4
Income taxes........................... (16.7) (35.7) (36.9) (62.8)
------- ------- ------- -------
Net income (Note 2).................... $ 73.6 $ 70.4 $ 134.8 $ 129.6
------- ------- ------- -------
------- ------- ------- -------
Earnings per share (Note 3)............ $ 0.28 $ 0.52
------- -------
------- -------
Weighted average shares outstanding.... 249.8 249.8
Cash dividends per share (Note 3)...... $ 0.05 $ 0.10
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
AT DECEMBER 31, 1995 AND JUNE 30, 1996
(Millions of Dollars)
(Unaudited)
December 31, June 30,
ASSETS 1995 1996
------------ --------
Current assets:
Cash and temporary investments............... $ 27.6 $ 20.2
Accounts receivable - net.................... 240.1 225.2
Inventories.................................. 67.5 41.2
Other current assets......................... 84.8 67.9
-------- --------
Total current assets..................... 420.0 354.5
-------- --------
Properties (successful efforts method):
Cost......................................... 5,450.4 5,777.7
Accumulated depreciation, depletion and
amortization............................... (2,686.1) (2,944.1)
-------- --------
Total properties - net................... 2,764.3 2,833.6
Intangible and other assets..................... 124.6 115.6
-------- --------
Total assets............................. $3,308.9 $3,303.7
-------- --------
-------- --------
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
AT DECEMBER 31, 1995 AND JUNE 30, 1996
(Millions of Dollars)
(Unaudited)
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996
------------ --------
Current liabilities:
Accounts payable............................. $ 347.0 $ 293.1
Accrued taxes payable........................ 87.4 80.7
Note payable to and advances from
Union Pacific Corporation - net (Note 2)... 567.8 484.9
Other current liabilities.................... 64.3 67.7
-------- --------
Total current liabilities................ 1,066.5 926.4
-------- --------
Long-term debt (Note 2)......................... 101.5 126.3
Deferred income taxes........................... 438.5 454.6
Other long-term liabilities (Note 5)............ 390.0 377.1
Shareholders' equity (Note 2):
Common stock, no par value; 400,000,000
shares authorized; 249,248,603 shares
issued and outstanding at December 31,
1995; 249,240,397 shares issued at
June 30, 1996.............................. -- --
Paid-in surplus.............................. 860.2 859.9
Retained earnings............................ 472.9 577.6
Unearned compensation........................ (9.2) (6.4)
Deferred foreign exchange adjustment......... (11.5) (11.4)
Treasury stock, at cost; 15,105 shares at
June 30, 1996.............................. -- (0.4)
-------- --------
Total shareholders' equity............... 1,312.4 1,419.3
-------- --------
Total liabilities and shareholders' equity $3,308.9 $3,303.7
-------- --------
-------- --------
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Millions of Dollars)
(Unaudited)
1995 1996
------- -------
Cash provided by operations:
Net income.................................... $ 134.8 $ 129.6
Non-cash charges to income:
Depreciation, depletion and amortization.... 219.5 251.2
Deferred income taxes....................... 8.4 16.2
Other non-cash charges - net................ 61.1 11.1
Changes in current assets and liabilities..... 33.5 0.9
------- -------
Cash provided by operations............... 457.3 409.0
------- -------
Investing activities:
Capital and exploratory expenditures.......... (366.7) (367.9)
Proceeds from sales of assets................. 37.0 24.9
Other investing activities - net.............. 0.1 --
------- -------
Cash used by investing activities......... (329.6) (343.0)
------- -------
Financing activities:
Dividends..................................... (62.0) (24.9)
Advances from (to) Union Pacific Corporation.. 0.4 (82.9)
Other financings - net........................ (53.1) 34.4
------- -------
Cash used by financing activities......... (114.7) (73.4)
------- -------
Net change in cash and temporary investments..... 13.0 (7.4)
Cash at beginning of period...................... 6.7 27.6
------- -------
Cash at end of period............................ $ 19.7 $ 20.2
------- -------
------- -------
See the notes to the condensed consolidated financial statements.
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UNION PACIFIC RESOURCES GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - The condensed consolidated
financial statements of Union Pacific Resources Group Inc. and subsidiaries
(the "Company") have been prepared by management and are unaudited. Such
unaudited interim financial statements have been reviewed by the Company's
independent accountants whose report thereon appears on page 11. Such
interim financial statements reflect all adjustments that are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results of the Company for the interim periods. The
Condensed Statement of Consolidated Financial Position at December 31, 1995
is derived from audited financial statements. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of the results for the full year ending December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions with respect to the future that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management believes
such estimates and assumptions are reasonable but such estimates and
assumptions are subject to a number of uncertainties and risks which may
cause actual results to differ from such estimates and assumptions. For
instance, the reported value of the Company's assets may be affected by
changes in the prices received for its hydrocarbon products and the cost to
find, develop, produce and market such resources. Other factors that may
affect the estimates and assumptions used in preparing the Company's
financial statements include, but are not limited to, uncertainties
inherent in estimating reserve quantities, the actions of customers and
competitors, changes in governmental regulation of the Company's
businesses, the availability of technology, uncertainties with respect to
legal matters, changes in general economic conditions and the state of
domestic capital markets.
Certain prior year amounts have been reclassified to conform to the current
presentation. Such reclassifications have no effect on operating income or
net income.
2. PRO FORMA INFORMATION - In October 1995, the Company sold 42.5 million
shares of its common stock in an initial public offering (the "Offering").
Prior to consummation of the Offering, the Company was wholly owned by
Union Pacific Corporation ("UPC"). UPC currently owns approximately 83% of
the Company's outstanding common stock. UPC has announced that it intends,
subject to the receipt of a favorable ruling from the Internal Revenue
Service ("IRS") and the satisfaction of certain other conditions, to
distribute pro rata to its shareholders as a dividend its remaining
ownership interest in the Company by means of a tax-free distribution (the
"Distribution"). The Distribution is
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expected to occur in the fourth quarter of 1996. No assurance can be
given, however, that such favorable tax ruling will be obtained or that,
in any event, the Distribution will occur.
The following pro forma information reflects adjustments to the historical
June 30, 1995 Condensed Statement of Consolidated Income necessary to give
effect to transactions occurring in connection with the Offering and the
related incurrence of additional debt as if such transactions had occurred
at the beginning of 1995.
Three Months Ended June 30, 1995
------------------------------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
---------- ----------- -----------
(Millions, except per share amounts)
Operating income..................... $ 88.1 $ (2.3)(a) $ 85.8
Other income - net................... 3.6 (1.3)(b) 2.3
Interest expense..................... (1.4) (14.9)(c) (16.3)
------- ------- -------
Income before income taxes........... 90.3 (18.5) 71.8
Income taxes......................... (16.7) 7.0 (d) (9.7)
------- ------- -------
Net income........................... $ 73.6 $ (11.5) $ 62.1
------- ------- -------
------- ------- -------
Earnings per share........................................ $ 0.25
-------
-------
Weighted average shares outstanding (e)................... 249.7
-------
-------
Six Months Ended June 30, 1995
------------------------------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
---------- ----------- -----------
(Millions, except per share amounts)
Operating income..................... $ 174.6 $ (4.6)(a) $ 170.0
Other income - net................... (0.3) (2.6)(b) (2.9)
Interest expense..................... (2.6) (29.8)(c) (32.4)
------- ------- -------
Income before income taxes........... 171.7 (37.0) 134.7
Income taxes......................... (36.9) 14.0 (d) (22.9)
------- ------- -------
Net income........................... $ 134.8 $ (23.0) $ 111.8
------- ------- -------
------- ------- -------
Earnings per share........................................ $ 0.45
-------
-------
Weighted average shares outstanding (e)................... 249.7
-------
-------
(a) Adjustment to reflect management's estimate of additional
administrative and third-party costs that the Company will incur as a
result of becoming a public company. These costs include (1)
additional administrative personnel, (2) additional third-party fees
such as audit fees, actuarial fees, legal fees and stock transfer
fees, (3) additional stock compensation costs related to employee
retention shares and (4) fees payable to UPC for certain financial
guarantees provided to the Company.
(b) Adjustment to eliminate intercompany interest income as a result of
the dividend to UPC of a $59 million intercompany receivable.
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(c) Adjustment to reflect increased interest expense on a $650 million
note payable to UPC at 8.5% per annum and $68 million in bank debt at
6.1% per annum.
(d) Adjustment to reflect decreased Federal and state income tax expense
resulting from increased expenses in (a) through (c) above, calculated
at an income tax rate of 37.5%.
(e) Pro forma earnings per share is based upon the average number of
shares of common stock outstanding during the period from completion
of the Offering until December 31, 1995, including shares issuable
upon exercise of outstanding stock options determined using the
treasury stock method.
Concurrent with the Distribution, pension assets related to UPC's funded
pension plan, in which the Company participates, will be allocated between
UPC and the Company. Based on the plan status as of December 31, 1995, the
additional cost to the Company associated with this allocation would be
approximately $6.7 million annually, which is not reflected in the pro
forma financial information above. The final allocation of pension plan
assets will be based on the plan status at the time of the Distribution;
therefore, actual amounts may differ from this estimate.
3. EARNINGS PER SHARE - Historical earnings and dividends per share for the
three months and six months ended June 30, 1995 have been omitted from the
Condensed Statements of Consolidated Income as the Company was a wholly
owned subsidiary of UPC during such periods (see Note 2 for pro forma
information).
4. PRICE RISK MANAGEMENT - The Company uses hydrocarbon-based derivative
financial instruments to limit the effects of unfavorable hydrocarbon price
movements and to retain the economic benefits of forward prices perceived
to be favorable. While the use of these hedging arrangements limits the
downside risk of adverse price movements, it may also limit future gains
from favorable movements. Hedging generally is accomplished pursuant to
exchange-traded futures contracts or master swap agreements based on
standard forms. The Company does not hold or issue such derivative
financial instruments for trading purposes and does not hedge any
significant amount of production beyond a 24 month time frame. The Company
addresses market risk by selecting hydrocarbon-based derivative financial
instruments whose historical value fluctuations correlate strongly with
those of the item being hedged. Credit risk related to hedging activities
is managed by requiring that counterparties meet certain minimum credit
standards and by mark-to-market analysis to determine if collateral is
required. At June 30, 1996, the largest credit risk associated with any of
the Company's counterparties was approximately $5.2 million. In connection
with its futures contract hedging activity, the Company is required to
deposit monies with the New York Mercantile Exchange ("NYMEX") representing
contract margin requirements and deposits required relating to unrealized
losses on open contracts. Such deposits are included in other current
assets in the Company's Statements of Consolidated Financial Position. At
June 30, 1996, the Company had made such deposits totaling $36.3 million,
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representing $11.8 million for contract margin deposits and $24.5 million
relating to unrealized losses on open contracts.
Basis risk arises from differences in the cash price of the hedged item and
the underlying price of the derivative financial instrument. The Company
uses futures contracts and price swaps denominated in NYMEX prices in its
hedging activities. In order to lessen the resulting basis risk and to
provide better correlation, the Company generally uses basis swaps in
combination with these futures contracts and price swaps. Because of
differences in the markets for NYMEX contracts and basis swaps, the Company
may temporarily have outstanding NYMEX contracts without corresponding
basis swaps, or basis swaps without corresponding NYMEX positions. During
such periods, unusual market price swings may weaken correlation between
the derivative financial instrument and the underlying item being hedged,
exposing the Company to potential losses. As of June 30, 1996, the Company
had no significant volumes hedged by outstanding NYMEX contracts without
corresponding basis swaps, or basis swaps without corresponding NYMEX
positions.
At June 30, 1996, the Company had entered into futures contracts and price
swaps for August through December 1996 with respect to average natural gas
sales volumes of 389 MMcfd at $2.22/Mcf (regional price before wellhead
deductions), and for January through March 1997 with respect to average
natural gas sales volumes of 40 MMcfd at $1.36/Mcf (Rockies price). Such
volumes would have represented approximately 40% and 4%, respectively, of
the Company's actual average daily natural gas sales for the first six
months of 1996. The unrecognized mark-to-market loss on such contracts at
June 30, 1996 was $11.4 million. With respect to crude oil, at June 30,
1996, the Company had entered into near-term futures contracts to hedge 9
MBbld of production for August through December 1996 at an average price of
$18.61/Bbl (NYMEX price). Such volume would have represented approximately
18% of its actual average daily crude oil production for the first six
months of 1996. The unrecognized mark-to-market loss on such contracts at
June 30, 1996 was $0.6 million. Additionally, the Company has purchased
commodity options which have the effect of locking in a minimum sales price
without eliminating the Company's participation in the benefits of higher
prices. As of June 30, 1996, the Company had effectively set a minimum
average crude oil price of $18.04/Bbl (NYMEX price net of premium payment)
for July through December 1996 with respect to 26 MBbld, as well as a
minimum average natural gas price of $2.04/Mcf, net of premium payment, for
August through December 1996 with respect to 178 MMcfd of Texas volumes.
Such volumes would have represented 51% and 18% of the Company's actual
average daily sales of crude oil and natural gas, respectively, for the
first six months of 1996. The unrecognized mark-to-market loss on such
crude oil and natural gas options at June 30, 1996 was $3.2 million.
The Company also enters into long-term fixed price sales agreements for
physical deliveries of natural gas and at June 30, 1996 had outstanding
contracts relating to 92.7 Bcf of natural gas for periods through December
31, 2008. Average annual commitments during this period constitute no more
than 2% of the Company's historical average annual natural gas sales
volumes. The Company's marketing subsidiary, Union Pacific Fuels, Inc.
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("UP Fuels"), enters into long-term financial contracts that, in
combination with these long-term fixed price sales agreements, secure a
margin on the corresponding volume positions. Where necessary, UP Fuels
also enters into basis swaps, which are currently available for 1996 and
1997, to strengthen the hedge securing the margin on the corresponding
positions. At June 30, 1996, long-term fixed price sales commitments
for which corresponding financial positions had not been entered into
totaled 71.0 Bcf at an average price of $2.85/Mcf, with a mark-to-market
present value gain of $20.7 million. The remaining commitments for 21.7
Bcf had been offset with financial contracts for similar volumes,
resulting in a $0.13/Mcf average profit on those volumes. The
unrecognized mark-to-market present value gain of $2.5 million related
to such hedged commitments at June 30, 1996 comprises a $9.5 million
gain on the long-term fixed price sales commitments and a $7.0 million
loss on the corresponding financial contracts.
At June 30, 1996, the Company had a total unrecognized mark-to-market
present value gain of $8.0 million related to all open financial and
forward sales contracts used to hedge associated risk. Such gain comprises
a $30.2 million net gain on contracts for physical delivery and a $22.2
million net loss on financial contracts. Unrecognized mark-to-market gains
or losses were determined based upon current market value, as quoted by
recognized dealers, assuming a round lot transaction and using a mid-market
convention without regard to market liquidity.
5. COMMITMENTS AND CONTINGENCIES - The Company is subject to Federal, state,
provincial and local environmental laws and regulations and is currently
participating in the investigation and remediation of a number of sites.
Where the remediation costs can be reasonably determined, and where such
remediation is probable, the Company has recorded a liability. Management
does not expect future environmental obligations to have a material impact
on the results of operations or financial condition of the Company.
In the last nine years, the Company has disposed of significant pipeline,
refining and producing property assets. In disposition agreements in
connection therewith, the Company has made certain representations and
warranties relating to the assets sold and provided certain indemnities
with respect to liabilities associated with such assets. The Company has
been advised of possible claims which may be asserted by the purchasers of
certain of the disposed assets for alleged breaches of such representations
and warranties and under certain indemnities. Certain claims related to
compliance with environmental laws remain pending. In addition, some of
the representations, warranties and indemnities related to some of the
disposed assets continue to survive under such disposition agreements.
Further claims may be made against the Company under such disposition
agreements or otherwise. While no assurance can be given as to the actual
outcome of these claims, the Company does not expect these matters to have
a materially adverse effect on its results of operations or financial
condition.
There are lawsuits pending against the Company and certain of its
subsidiaries which are described in Part I, Item 3 - Legal Proceedings in
the Company's 1995 Annual Report on Form 10-K and in Part II, Item 1 -
Legal Proceedings in this report. While the Company intends to defend
vigorously
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against the foregoing lawsuits and any similar lawsuits, if such suits
are ultimately resolved against the Company on a widespread basis,
damage awards and a loss of future revenue could result which, in the
aggregate, could be material.
The Company is a defendant in a number of other lawsuits and is involved in
governmental proceedings arising in the ordinary course of business in
addition to those described above. The Company also has entered into
commitments and provided guarantees for specific financial and contractual
obligations of its subsidiaries and affiliates. The Company does not
expect that these lawsuits, commitments or guarantees will have a
materially adverse effect on its results of operations or financial
condition.
See Note 1 for risk factors that may cause actual results related to
contingencies to differ from management's forward looking expectations
expressed herein.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed statement of consolidated financial
position of Union Pacific Resources Group Inc. (the "Company") as of June 30,
1996, and the related condensed statements of consolidated income for the three-
month and six-month periods ended June 30, 1995 and 1996 and the condensed
statements of consolidated cash flows for the six months ended June 30, 1995 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of Union Pacific
Resources Group Inc. as of December 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 18,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed statement of consolidated financial position as of December 31, 1995
is fairly stated, in all material respects, in relation to the statement of
consolidated financial position from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 18, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNION PACIFIC RESOURCES GROUP INC.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1995 COMPARED TO JUNE 30, 1996
OVERVIEW
Three Months Ended June 30,
---------------------------
1995 1996
------ ------
(Millions of dollars)
Selected financial data:
Total operating revenues............... $341.3 $427.9
Total operating expenses............... 253.2 307.8
Operating income....................... 88.1 120.1
Net income............................. 73.6 70.4
The Company reported net income of $70.4 million ($0.28 per share) for the
quarter ended June 30, 1996, down by $3.2 million from historical net income of
$73.6 million in 1995. On a historical basis, improved operating results were
more than offset by additional interest and, to a lesser extent, general and
administrative expenses incurred as a public company following the Company's
initial public offering in October 1995, and the absence of a 1995 favorable tax
adjustment with respect to the Company's Minerals business. On a pro forma
basis, after giving effect to transactions occurring at the time of the
Company's initial public offering as if such transactions had occurred at the
beginning of 1995, net income for the second quarter of 1996 would have been
$8.3 million (13%) above pro forma second quarter 1995 net income of $62.1
million (see Note 2 to the Condensed Consolidated Financial Statements).
Operating income increased by $32.0 million (36%) to $120.1 million as a
result of higher product price realizations (16%), volume growth (10%),
pipeline expansions and increased marketing income. Demand for inventory
rebuilding due to depleted inventory levels following the long cold winter,
among other factors, has supported prices for most products. Volume growth
has been achieved through drilling, property purchases, plant expansions
and ethane recovery. These gains were partially offset by the cost
associated with an increase in exploration activity.
Total operating revenues increased by $86.6 million (25%) to $427.9 million in
1996 resulting from an increase in producing property revenues of $52.5 million
and an increase in plants, pipelines and marketing revenues of $38.5 million.
Operating expenses grew by $54.6 million (22%) to $307.8 million reflecting
increases in plants, pipelines and marketing expenses ($20.0 million),
depreciation, depletion and amortization expense ($14.4 million), exploration
expenses ($10.2 million), production costs ($6.2 million) and general and
administrative costs ($4.4 million).
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OIL AND GAS OPERATIONS
OPERATING REVENUES
Three Months Ended June 30,
---------------------------
1995 1996
------ ------
(Millions of dollars)
Operating revenues:
Producing properties................... $215.3 $267.8
Plants, pipelines and marketing........ 87.1 125.6
Other oil and gas revenues............. 9.9 4.4
Producing property revenues increased by $52.5 million (24%) to $267.8 million.
Production volume increases of 105.5 MMcfed (8%) added $11.6 million in
revenues while higher product prices of $0.27/Mcfe (16%) added $40.9 million.
Three Months Ended June 30,
---------------------------
1995 1996
------ ------
Production volumes - producing properties:
Natural gas (MMcfd).................... 906.4 978.9
Natural gas liquids (MBbld)............ 20.8 29.1
Crude oil (MBbld)...................... 54.4 51.6
Total (MMcfed)......................... 1,357.6 1,463.1
Three Months Ended June 30,
----------------------------------
1995 1996 1995 1996
------ ------ ------ ------
(without Hedging) (with Hedging)
Average product price realizations -
producing properties:
Natural gas (per Mcf)......... $ 1.35 $ 1.73 $ 1.45 $ 1.68
Natural gas liquids (per Bbl). 8.67 9.35 8.24 9.35
Crude oil (per Bbl)........... 17.23 20.07 16.23 19.85
Average (per Mcfe)............ 1.72 2.05 1.74 2.01
Natural gas volumes increased by 72.5 MMcfd (8%) to 978.9 MMcfd primarily
attributable to drilling success and property purchases in the Austin Chalk
(86.1 MMcfd). Other volume increases from West Texas (19.4 MMcfd) primarily
related to the Company's in-fill drilling program, and from the Rockies (11.1
MMcfd) principally reflecting operations improvements, partially offset declines
in the Gulf Coast (39.9 MMcfd) resulting largely from the depletion of several
offshore wells. Crude oil volumes decreased by 2.8 MBbld (5%) to 51.6 MBbld as
a result of normal production declines in Plains Canada and the Rockies and the
sale of non-core West Texas properties, partially offset by property
acquisitions and continued drilling in the Austin Chalk. Natural gas liquids
volumes from producing properties increased by 8.3 MBbld (40%) to 29.1 MBbld due
to ethane recovery in the Rockies and Plains Canada and additional lease gas
being processed by expanded plant capacity in Austin Chalk and the Rockies.
Plants, pipelines and marketing revenues increased by $38.5 million (44%) to
$125.6 million. Increased plant volumes of 51.3 MMcfed (23%) added $7.5 million
in plant revenues while higher prices of $0.26/Mcfe (16%) added $6.5 million in
plant revenues. Pipeline revenues increased by $20.7 million to $47.4 million
primarily as a result of the expansion of the Company's West Texas and Austin
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Chalk pipelines. Marketing revenues increased by $6.1 million to $26.7 million
primarily due to improved margins and additional marketed natural gas and
natural gas liquids volumes.
Three Months Ended June 30,
---------------------------
1995 1996
----- -----
Sales volumes - plants:
Natural gas (MMcfd).................... 22.8 25.5
Natural gas liquids (MBbld)............ 33.5 41.6
Total (MMcfed)......................... 223.8 275.1
Average product price realizations - plants:
Natural gas (per Mcf).................. $ 1.71 $ 2.05
Natural gas liquids (per Bbl).......... 9.64 11.14
Average (per Mcfe)..................... 1.62 1.88
Natural gas liquids volumes increased by 8.1 MBbld (24%) to 41.6 MBbld primarily
due to the expansion of the Company's two Ozona plants in West Texas, greater
retention percentages at the East Texas plant and ethane recovery at the Rockies
plants, partially offset by lower throughput at Giddings plants in Austin Chalk.
Natural gas volumes were up by 2.7 MMcfd (12%) to 25.5 MMcfd.
Other oil and gas revenues declined by $5.5 million primarily as a result of
lower preferential volumes distributed to an investor in the Company's Section
29 limited partnership ($3.9 million).
OPERATING EXPENSES
Three Months Ended June 30,
---------------------------
1995 1996
---- ----
(Millions of dollars)
Operating expenses:
Production.............................. $ 57.4 $ 63.6
Exploration............................. 22.0 32.2
Plants, pipelines and marketing......... 45.8 65.8
Depreciation, depletion and amortization 113.1 127.5
Production expenses increased by $6.2 million (11%) to $63.6 million, largely
attributable to the 105.5 MMcfed volume increase. Production expenses on a per
unit basis increased from $0.47/Mcfe to $0.48/Mcfe.
Exploration expenses increased by $10.2 million (46%) to $32.2 million primarily
due to an increase in the dry hole provision ($5.5 million) and higher non-
producing lease amortization ($3.6 million) resulting from expanded exploration
activities in Austin Chalk, East Texas and North Dakota.
Operating expenses for plants, pipelines and marketing increased by $20.0
million (44%) to $65.8 million as a result of higher pipeline expenses ($14.7
million) primarily attributable to the expansion of the Company's West Texas and
Austin Chalk pipelines and higher gas purchase costs at gas plants ($5.3
million).
Depreciation, depletion and amortization ("DD&A") increased by $14.4 million
(13%) to $127.5 million. DD&A related to oil and gas operations accounted for
$14.1 million of this increase, resulting primarily from higher producing
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<PAGE>
property volumes, a larger proportion of production coming from higher cost
areas such as Austin Chalk and West Texas, and a higher asset base in plants and
pipelines. On a per unit basis for producing properties, DD&A increased by
$0.04/Mcfe from $0.80/Mcfe to $0.84/Mcfe.
OIL AND GAS OPERATING INCOME
Total oil and gas operating income increased by $35.0 million (47%) to $109.7
million with higher producing property operating income of $19.2 million and
increased plants, pipelines and marketing operating income of $15.8 million.
MINERALS - Minerals revenues increased by $1.1 million to $30.1 million,
reflecting higher soda ash joint venture income and an increase in ballast
operations, partially offset by lower coal royalty income. Minerals expenses
excluding DD&A were down by $0.6 million. As a result, Minerals operating
income increased by $1.6 million.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased by $4.4 million (36%) to $16.5 million principally reflecting
increased costs associated with being a public company. On a per unit basis,
general and administrative expenses increased by $0.02/Mcfe (25%) to $0.10/Mcfe.
INTEREST AND OTHER INCOME - Interest expense increased by $11.1 million to $12.5
million, while other income/expense is unfavorable by $5.1 million. The
increase in interest expense principally reflects debt incurred at the time of
the Company's initial public offering.
INCOME TAXES - Income taxes increased by $19.0 million to $35.7 million
reflecting higher income before taxes and the absence of a favorable 1995 tax
adjustment in connection with the receipt of an IRS settlement related to the
Company's Minerals business ($10.0 million). In addition, an unfavorable state
tax adjustment of $3.0 million related to settlement of prior years' Federal
income tax audits was recorded in 1996. Excluding these tax adjustments, the
effective tax rate for 1996 was 30.8% (including $3.9 million of Section 29 tax
credits) compared with 29.6% for 1995 (including $5.5 million of Section 29 tax
credits).
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO JUNE 30, 1996
OVERVIEW
Six Months Ended June 30,
-------------------------
1995 1996
---- ----
(Millions of dollars)
Selected financial data:
Total operating revenues............... $666.0 $817.6
Total operating expenses............... 491.4 600.2
Operating income....................... 174.6 217.4
Net income............................. 134.8 129.6
The Company reported net income of $129.6 million for the six months ended June
30, 1996, down by $5.2 million from historical net income of $134.8 million in
1995. On a historical basis, improved operating results which reflected higher
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<PAGE>
product prices, increased volumes, pipeline expansions and higher income from
marketing and minerals activities, were more than offset by additional interest
and, to a lesser extent, general and administrative expenses incurred as a
public company following the Company's initial public offering in October 1995,
and the absence of a 1995 favorable tax adjustment related to the Company's
Minerals business. On a pro forma basis, after giving effect to transactions
occurring at the time of the Company's initial public offering as if such
transactions had occurred at the beginning of 1995, net income for the first six
months of 1996 would have been $17.8 million (16%) above pro forma first six
months 1995 net income of $111.8 million (see Note 2 to the Condensed
Consolidated Financial Statements).
Total operating revenues increased by $151.6 million (23%) to $817.6 million in
1996 resulting from an increase in producing property revenues of $78.9 million
and an increase in plants, pipelines and marketing revenues of $77.1 million.
Operating expenses rose by $108.8 million (22%) to $600.2 million reflecting
increases in plants, pipelines and marketing expenses ($39.8 million),
depreciation, depletion and amortization expense ($31.7 million), exploration
expenses ($19.4 million), production costs ($11.0 million) and general and
administrative costs ($7.6 million). Operating income increased by $42.8
million (25%) to $217.4 million.
OIL AND GAS OPERATIONS
OPERATING REVENUES
Six Months Ended June 30,
-------------------------
1995 1996
------ ------
(Millions of dollars)
Operating revenues:
Producing properties................... $420.9 $499.8
Plants, pipelines and marketing........ 162.7 239.8
Other oil and gas revenues............. 27.2 16.7
Producing property revenues increased by $78.9 million (19%) to $499.8 million.
Production volume increases of 50.5 MMcfed (4%) added $8.2 million in revenues
while higher product prices of $0.23/Mcfe (14%) added $70.7 million.
Six Months Ended June 30,
-------------------------
1995 1996
------ ------
Production volumes - producing properties:
Natural gas (MMcfd).................... 898.3 954.7
Natural gas liquids (MBbld)............ 23.0 26.9
Crude oil (MBbld)...................... 55.5 50.6
Total (MMcfed)......................... 1,369.2 1,419.7
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<PAGE>
Six Months Ended June 30,
-------------------------------
1995 1996 1995 1996
---- ---- ---- ----
(without Hedging) (with Hedging)
Average product price realizations -
producing properties:
Natural gas (per Mcf)........ $ 1.29 $ 1.73 $ 1.38 $ 1.64
Natural gas liquids (per Bbl) 8.40 9.50 8.14 9.50
Crude oil (per Bbl).......... 16.73 18.83 16.16 18.31
Average (per Mcfe)........... 1.67 2.01 1.70 1.93
Natural gas volumes increased by 56.4 MMcfd (6%) to 954.7 MMcfd as increases
from the Company's Austin Chalk development drilling program and property
acquisitions were partially offset by declines in the Gulf Coast resulting from
the depletion of several offshore wells. Crude oil volumes decreased by 4.9
MBbld (9%) to 50.6 MBbld as a result of normal production declines in Plains
Canada and the Rockies, partially offset by property acquisitions and continued
drilling in the Austin Chalk. Natural gas liquids volumes from producing
properties increased by 3.9 MBbld (17%) to 26.9 MBbld with all business units
showing improvement.
Plants, pipelines and marketing revenues increased by $77.1 million (47%) to
$239.8 million. Increased plant volumes of 41.8 MMcfed (19%) added $12.5
million in plant revenues while higher prices of $0.27/Mcfe (17%) added $13.4
million in plant revenues. Pipeline revenues advanced by $36.3 million
primarily as a result of the expansion of the Company's West Texas and Austin
Chalk pipelines. Marketing revenues increased by $20.1 million due to improved
margins and additional marketed natural gas and natural gas liquids volumes.
Six Months Ended June 30,
-------------------------
1995 1996
----- -----
Sales volumes - plants:
Natural gas (MMcfd).................... 21.9 25.3
Natural gas liquids (MBbld)............ 33.4 39.8
Total (MMcfed)......................... 222.3 264.1
Average product price realizations - plants:
Natural gas (per Mcf).................. $ 1.61 $ 1.89
Natural gas liquids (per Bbl).......... 9.45 11.14
Average (per Mcfe)..................... 1.59 1.86
Natural gas liquids volumes increased by 6.4 MBbld (19%) to 39.8 MBbld primarily
due to the expansion of the Company's two Ozona plants in West Texas. Natural
gas volumes were up by 3.4 MMcfd (16%) to 25.3 MMcfd.
Other oil and gas revenues declined by $10.5 million to $16.7 million primarily
as a result of lower preferential volumes distributed to an investor in the
Company's Section 29 limited partnership.
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<PAGE>
OPERATING EXPENSES
Six Months Ended June 30,
-------------------------
1995 1996
------ ------
(Millions of dollars)
Operating expenses:
Production.............................. $115.4 $126.4
Exploration............................. 42.5 61.9
Plants, pipelines and marketing......... 86.6 126.4
Depreciation, depletion and amortization 219.5 251.2
Production expenses increased by $11.0 million (10%) to $126.4 million largely
attributable to the increase in volume. Production expenses on a per unit basis
increased from $0.47/Mcfe to $0.49/Mcfe.
Exploration expenses increased by $19.4 million (46%) to $61.9 million
primarily due to an increase in the dry hole provision and higher non-producing
lease amortization reflecting expanded exploration activities in Austin Chalk,
East Texas and North Dakota.
Operating expenses for plants, pipelines and marketing increased by $39.8
million (46%) to $126.4 million primarily due to the expansion of pipeline
assets and higher gas purchase costs at gas plants.
Depreciation, depletion and amortization increased by $31.7 million (14%) to
$251.2 million. DD&A related to oil and gas operations accounted for $31.1
million of this increase as a result of higher producing property volumes, the
$6.2 million writedown of an offshore Gulf Coast property, a larger proportion
of production coming from higher cost areas such as Austin Chalk and West Texas
and a higher asset base in plants and pipelines. On a per unit basis for
producing properties, DD&A, excluding the writedown, increased by $0.04/Mcfe
from $0.78/Mcfe to $0.82/Mcfe.
OIL AND GAS OPERATING INCOME
Total oil and gas operating income increased by $44.2 million (30%) to $192.4
million with higher producing property operating income of $12.5 million and
higher plants, pipelines and marketing operating income of $31.7 million.
MINERALS - Minerals revenues increased by $6.1 million to $61.3 million due to
higher coal and soda ash joint venture and royalty income and an increase in
ballast operations. Minerals expenses excluding DD&A were down by $0.7 million.
As a result, Minerals operating income increased by $6.8 million.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased by $7.6 million (33%) to $30.5 million principally reflecting
increased costs associated with being a public company. On a per unit basis,
general and administrative expenses increased by $0.02/Mcfe (25%) to $0.10/Mcfe.
INTEREST AND OTHER INCOME - Interest expense increased by $22.9 million to $25.5
million, while other income/expense is favorable by $0.8 million. The increase
in interest expense principally reflects debt incurred at the time of the
Company's initial public offering.
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<PAGE>
INCOME TAXES - Income taxes increased by $25.9 million to $62.8 million as a
result of higher income before taxes and the absence of a favorable 1995 tax
adjustment in connection with the receipt of an IRS settlement related to the
Company's Minerals business ($10.0 million). In addition, an unfavorable state
tax adjustment of $3.0 million related to settlement of prior years' Federal
income tax audits was recorded in 1996. Excluding these tax adjustments, the
effective tax rate for 1996 was 31.1% (including $7.8 million of Section 29 tax
credits) compared with 27.3% for 1995 (including $11.0 million of Section 29 tax
credits).
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash during the first six months of 1996 included cash
from operations, net proceeds from the issuance of commercial paper and proceeds
from the sale of non-core assets. Cash outflows included capital expenditures
for oil and gas operations, advances to UPC and dividends. The Company
generally funds its capital spending program through internally-generated cash
flows.
Cash provided by operations for the first six months of 1996 was $409 million, a
decrease of $48.3 million (11%) from the corresponding period of 1995.
Increases in cash operating income from plants, pipelines and marketing ($37.3
million) and advances in producing property revenues net of production costs
($67.9 million) were more than offset by an increase in interest and, to a
lesser extent, general and administrative costs principally associated with
becoming a public company ($30.5 million), the 1996 payment of taxes related to
the Columbia Gas Transmission Company bankruptcy settlement ($40.0 million) and
the absence of a 1995 tax refund ($56.8 million). In addition, 1995 cash from
operations benefitted from the receipt of proceeds related to expansion of the
Panola pipeline ($36.0 million), which has been partially offset by a decrease
in futures margin deposits related to the Company's hedging activities.
Capital expenditures for the first six months of 1996 were $367.9 million, an
increase of $1.2 million from the first six months of 1995. Capital and
exploratory expenditures are summarized as follows:
Six Months Ended June 30,
-------------------------
1995 1996
------ ------
(Millions of dollars)
Capital expenditures:
Producing properties................... $296.2 $297.3
Plants, pipelines and marketing........ 69.2 64.6
Minerals and other..................... 1.3 6.0
------ ------
Total.................................. $366.7 $367.9
------ ------
------ ------
Total producing property capital spending was essentially flat; however, higher
lease acquisition costs primarily in the Austin Chalk and East Texas were offset
by reduced property purchases and lower development spending. Drilling
accounted for $176.6 million (59%) of the producing property expenditures with
$96.2 million in the Austin Chalk. Included in 1996 are two producing property
acquisitions in the Austin Chalk totaling $54.1 million.
Plants, pipelines and marketing expenditures were down by $4.6 million
reflecting
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<PAGE>
the completion of plant and pipeline construction in 1995 ($31.5 million)
partially offset by the $27.9 million purchase of the Panola pipeline
(previously leased) in June 1996.
The Company's total debt at June 30, 1996 of $611.2 million includes short-term
debt of $484.9 million payable to UPC, commercial paper of $92.8 million and tax
exempt revenue bonds of $33.5 million.
The short-term debt payable to UPC comprises a $650 million note payable
incurred in connection with the Offering partially offset by $165.1 million in
cumulative advances related to the Company's cash management agreement with
UPC. Under the terms of the cash management agreement, excess funds
generated or cash borrowings required by the Company are transferred to and from
UPC and earn or bear interest, as the case may be, at 8.5% per annum. During
the first six months of 1996, the Company transferred $82.9 million to UPC in
accordance with this agreement, which principally reflects the excess of the
Company's cash generated from operations of $409 million plus net financing
proceeds of $34.4 million over current period capital expenditures of $367.9
million. The cash management agreement offers available credit to the
Company up to a $200 million aggregate limit on net advances by UPC. None of
this available credit has been utilized as of June 30, 1996. The intercompany
debt is payable within 90 days following the Distribution (see "A Look
Forward").
During the second quarter of 1996, the Company issued $93 million ($92.8 million
after discount) of commercial paper. Proceeds were used to repay outstanding
debt under the Company's bank credit agreement ($68 million) and to purchase the
Panola pipeline which previously had been leased. Outstanding commercial paper,
which bears interest at 5.5%, has been classified as long-term debt based on the
Company's intent and ability to refinance these short-term borrowings on a long-
term basis through the issuance of additional commercial paper or by using its
currently available $100 million bank credit facility.
The Company also has filed a shelf registration statement with the Securities
and Exchange Commission which provides the capacity to issue up to $700 million
of debt securities. The extent and timing of debt issuances under the
registration statement will be determined by management based on business needs
and conditions in the capital markets.
The Company paid a $0.05 per share ($12.5 million) quarterly cash dividend on
its outstanding shares of common stock in April 1996. This compares to a
cash dividend of $31 million paid to UPC in the second quarter of 1995. In
addition, on May 23, 1996, the Board of Directors declared a cash dividend of
$0.05 per share payable in the third quarter of 1996.
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<PAGE>
A LOOK FORWARD
The Company has spent $368 million in capital during the first six months of
1996 and expects additionally to spend approximately $400 million during the
last six months of 1996. Such expected spending may be affected by changes in
business and operating conditions as well as by the timing of project
investments. The Company expects to remain one of the most active drillers in
the United States in 1996 based on the number of active drilling rigs. Drilling
is expected to focus in the Austin Chalk, Gulf Coast, West Texas and East/South
Texas. The Company also expects to increase its oil and gas production volume
in 1996 while maintaining its reserve position. This volume growth is
anticipated primarily in the Austin Chalk and West Texas. The Company will
continue to pursue acquisition opportunities which benefit earnings and cash
flow.
The Distribution is expected to occur in the fourth quarter of 1996. Prior to
90 days following the Distribution, when the Company's intercompany debt becomes
due, management intends to refinance its existing debt portfolio with a
combination of long-term fixed rate notes and debentures and short-term
commercial paper supported by a revolving credit agreement. Based on the
Company's investment grade credit rating and favorable debt to capitalization
ratio, management believes that it will be able to refinance its debt
successfully. Following the anticipated refinancing of its debt, cash from
operations and available financing should enable the Company to fund its capital
expenditures, dividends and working capital requirements.
FORWARD LOOKING INFORMATION
Certain information included in this report contains, and other materials filed
or to be filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements made
or to be made by the Company) contain or will contain or include, forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Such forward looking statements may be or may concern, among other
things, capital expenditures, drilling activity, acquisitions and dispositions,
the Distribution and conditions and transactions related thereto, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, hedging activities and the results thereof, liquidity,
regulatory matters, competition and the Company's ability to realize significant
improvements with the change to a more adaptive corporate culture.
Such forward looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of
uncertainties and risks that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may
differ materially from expectations, estimates or assumptions expressed in any
forward looking statements made by or on behalf of the Company. The risks and
uncertainties include generally the volatility of oil, gas and hydrocarbon-based
financial derivative prices; basis risk and counterparty credit risk in
executing hydrocarbon price risk management; economic, political, judicial and
regulatory developments; competition in the industry as well as competition from
other
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<PAGE>
sources of energy; the economics of producing certain reserves; demand and
supply of oil and gas; the ability to find or acquire and develop reserves of
natural gas and crude oil; and the action of customers and competitors.
With respect to expected capital expenditures and drilling activity, additional
factors such as the extent of the Company's success in acquiring oil and gas
properties and in identifying prospects for drilling, the availability of
acquisition opportunities which meet the Company's objectives as well as
competition for such opportunities, exploration and operating risks, the success
of management's cost reduction efforts and the availability of technology may
affect the amount and timing of such capital expenditures and drilling activity.
With respect to expected growth in production volumes and estimated reserve
quantities, additional factors such as the extent of the Company's success in
finding, developing and producing reserves, the timing of capital spending and
acquisition programs, uncertainties inherent in estimating reserve quantities
and the availability of technology may affect such production volumes and
reserve estimates. With respect to liquidity, factors such as the state of
domestic capital markets, credit availability from banks or other lenders, the
Company's results of operations and restrictions imposed by agreements between
the Company and UPC may affect management's plans or ability to incur additional
indebtedness or to refinance existing debt. With respect to cash flow, factors
such as changes in oil and gas prices, the Company's success in acquiring
producing properties, environmental matters and other contingencies, hedging
activities, the Company's credit rating and debt levels, and the state of
domestic capital markets may affect the Company's ability to generate expected
cash flows. With respect to contingencies, factors such as changes in
environmental and other governmental regulation, and uncertainties with respect
to legal matters may affect the Company's expectations regarding the potential
impact of contingencies on the operating results or financial condition of the
Company. Certain factors, such as changes in oil and gas prices and underlying
demand and the extent of the Company's success in exploiting its current
reserves and acquiring or finding additional reserves may have pervasive effects
on many aspects of the Company's business in addition to those outlined above.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 31, 1995, the Texas General Land Office and two other royalty owners
filed a suit against the Company in the Texas District Court of Fayette County,
Texas. The suit alleges that the Company underpaid the plaintiffs for their
royalty interest share of the Company's crude oil production in Texas, and seeks
certification as a class action. Since late August 1995, the Company has been
made a party to a number of other lawsuits making allegations similar to those
made in the Fayette County suit. On August 25, 1995, an individual interest
owner filed suit in County Court in Calhoun County, Texas and on August 31,
1995, the Lee County Attorney filed suit in the Texas District Court in Lee
County on behalf of the State of Texas, Lee County and two individual royalty
owners. These additional suits all name the Company and a number of other
non-affiliated defendants, and all seek certification as class actions. The
premise of these suits is that the Company and the other named defendants used
"posted prices" to determine the amounts payable for crude oil production
attributable to the plaintiffs' interests. Plaintiffs allege that these posted
prices have been set consistently below "market value," and that this practice
has resulted in plaintiffs and other interest owners being underpaid for their
interests. The Lee County case also alleges discriminatory practices in sales
of crude oil, claims that the defendants have conspired and acted in concert to
accomplish a shared unlawful purpose in making sales of crude oil, and alleges
violations of numerous state statutes. The Calhoun County case makes additional
claims not made in the other suits, including claims with respect to prices paid
for natural gas and natural gas liquids as well as for crude oil. The Calhoun
County case alleges that the defendants discriminated against plaintiffs in (1)
sales of natural gas and natural gas liquids, (2) charges for transportation and
other services and (3) the prices used for accounting to the plaintiffs for such
sales and services. The Calhoun County suit also alleges that the Company and
the other named defendants have breached fiduciary duties to certain purported
class members and intentionally misrepresented the circumstances of their
purchases and sales of oil. In addition, the Lee County and Calhoun County
cases name the Company's marketing subsidiary, UP Fuels, and certain other
affiliates of the Company as defendants. These suits are similar to suits
recently brought in Texas by the Texas General Land Office against eight other
major crude oil producers and in New Mexico, Louisiana, Oklahoma and Alabama by
private royalty owners against a number of major crude oil producers, not
including the Company. Also, an additional suit has been filed in Lee County
against a number of major crude oil producers. This suit, which does not name
the Company, makes allegations similar to the Lee County suit described above.
None of the suits described above articulate a theory of recovery or allege a
specific amount of damages. This litigation activity against the Company and
other crude oil and natural gas producers suggests that more suits of this type
may be filed against the Company including, perhaps, suits by other types of
interest owners and in jurisdictions other than Texas. While the Company
intends to defend vigorously against the foregoing lawsuits and any similar
lawsuits, if such suits are ultimately resolved against the Company on a
widespread basis, damage awards and a loss of future revenue could result which,
in the aggregate, could be material.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 2, 1996, in
Fort Worth, Texas, for the purpose of electing a board of directors and
approving the appointment of auditors. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's solicitations.
(a) Each of the directors nominated by the Board and listed in the proxy
statement was elected with the votes as follows:
Shares Shares
For Withheld
----------- --------
H. Jesse Arnelle 233,789,820 142,916
Lynne V. Cheney 233,720,244 212,488
Lawrence M. Jones 233,790,020 142,716
Drew Lewis 233,719,807 214,093
Claudine B. Malone 233,790,320 142,416
L. White Matthews, III 233,723,420 209,370
Jack L. Messman 233,723,720 209,072
John W. Poduska, Sr., Ph.D. 233,790,320 142,499
Gary M. Stuart 233,723,420 209,370
Judy L. Swantak 233,723,420 209,402
James R. Thompson 233,789,820 142,916
Carl W. von Bernuth 233,723,220 209,604
(b) The appointment of Deloitte & Touche LLP, independent public
accountants, as auditors for the year ending December 31, 1996 was approved by
the following vote: 233,889,570 shares for; 27,530 shares against; and 15,020
shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of August 13,
1996
27 Financial data schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1996
UNION PACIFIC RESOURCES GROUP INC.
(Registrant)
/s/ Morris B. Smith
---------------------------------
Morris B. Smith,
Vice President and Chief Financial
Officer
(Chief Accounting Officer and
Duly Authorized Officer)
-25-
<PAGE>
UNION PACIFIC RESOURCES GROUP INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of earnings per share
12 Computation of ratio of earnings to fixed charges
15 Awareness letter of Deloitte & Touche LLP dated as of August 13, 1996
27 Financial data schedule
<PAGE>
EXHIBIT 11
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(Shares in Thousands)
(Unaudited)
Six Months
Ended June 30,
------------------
1995 1996
-------- -------
(Pro forma)
(a)
Average number of shares outstanding............... 248,896 248,928
Average shares issuable on exercise of stock
options less shares repurchasable from
proceeds......................................... 778 922
------- -------
Total average number of common and common
equivalent shares................................ 249,674 249,850
------- -------
------- -------
Net income (millions) (see Note 2 to the Condensed
Consolidated Financial Statements)............... $ 111.8 $ 129.6
------- -------
------- -------
Earnings per share................................. $ 0.45 $ 0.52
------- -------
------- -------
(a) Pro forma earnings per share is based upon the average number of common
shares outstanding from the date of the Company's initial public offering
(October 10, 1995) until December 31, 1995.
<PAGE>
EXHIBIT 12
UNION PACIFIC RESOURCES GROUP INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in Thousands, Except Ratios)
(Unaudited)
Six Months
Ended June 30,
---------------------
1995 1996
--------- ---------
Income before income taxes......................... $ 171,730 $ 192,350
Add distributions greater than income of
unconsolidated affiliates........................ 3,783 2,398
Fixed charges (a).................................. 6,593 29,041
Capitalized interest included in fixed charges..... (551) (122)
--------- ---------
Earnings available for fixed charges.......... $ 181,555 $ 223,667
--------- ---------
--------- ---------
Fixed charges:
Interest expense (a)............................. $ 2,609 $ 25,567
Portion of rentals representing an interest
factor......................................... 3,433 3,352
Interest capitalized............................. 551 122
--------- ---------
Total fixed charges........................... $ 6,593 $ 29,041
--------- ---------
--------- ---------
Ratio of earnings to fixed charges (a)............. 27.5 7.7
--------- ---------
--------- ---------
(a) In 1996, interest expense includes the effects of debt incurred in October
1995 in connection with the Company's initial public offering (see Note 2
to the Condensed Consolidated Financial Statements).
<PAGE>
EXHIBIT 15
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
August 13, 1996
Union Pacific Resources Group Inc.
801 Cherry Street
Fort Worth, Texas 76102
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Union Pacific Resources Group Inc. for the periods ended June 30,
1995 and 1996, as indicated in our report dated July 18, 1996; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is
incorporated by reference in Registration Statement No. 333-2984 on Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNION PACIFIC RESOURCES GROUP INC. CONDENSED STATEMENT OF CONSOLIDATED
FINANCIAL POSITION AT JUNE 30, 1996 (UNAUDITED) AND THE RELATED CONDENSED
STATEMENT OF CONSOLIDATED INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,200
<SECURITIES> 0
<RECEIVABLES> 225,200
<ALLOWANCES> 0
<INVENTORY> 41,200
<CURRENT-ASSETS> 354,500
<PP&E> 5,777,700
<DEPRECIATION> 2,944,100
<TOTAL-ASSETS> 3,303,700
<CURRENT-LIABILITIES> 926,400
<BONDS> 126,300
0
0
<COMMON> 0
<OTHER-SE> 1,419,300
<TOTAL-LIABILITY-AND-EQUITY> 3,303,700
<SALES> 0
<TOTAL-REVENUES> 817,600
<CGS> 0
<TOTAL-COSTS> 600,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,500
<INCOME-PRETAX> 192,400
<INCOME-TAX> 62,800
<INCOME-CONTINUING> 129,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,600
<EPS-PRIMARY> .52
<EPS-DILUTED> 0
</TABLE>
